AP Worldstream: South America goes nationalist with its oil and gas amid high world prices: Friday Oct 14, 2005

NATALIE OBIKO PEARSON

Protesters in Ecuador have dynamited oil pipelines, a Bolivian presidential candidate says he wants to seize private gas fields, and Venezuela is threatening to kick out any foreign oil companies that won't submit to more state control.

For international oil companies like BP PLC and Exxon Mobil Corp. and their customers, who used to look to South America for stable supplies, this powerful wave of nationalist sentiment comes at a particularly bad time.

Tight supplies worldwide already have driven oil prices close to record highs, and while the nationalist swing is unlikely to further escalate prices unless it curtails oil production or exports, it's heightening risk in a region that once was willing to offer much more to attract foreign investment, experts say.

Some warn that such changes could land governments in a tight spot if oil prices fall, investment has been compromised, and there's less to meet the inflated expectations of poorer citizens who have been promised more benefits.

But many political leaders say those are risks worth taking for a region where 35 percent of the residents live on less than $2 (A1.67) a day. "We need to take back our national power, our sovereignty to manage our resources," said Venezuelan President Hugo Chavez, who has become one of the continent's most forceful voices for redirecting oil money from corporate giants to the poor.

Venezuela supplies 13 percent of U.S. crude oil imports, and Chavez's government has passed laws in the last four years that require state-owned Petroleos de Venezuela S.A. (PDVSA) to obtain a majority stake in all oil production projects, raised royalties on heavy crude production from 1 percent to as high as 30 percent, and required firms pumping oil to pay income taxes at a top rate of 50 percent, up from the previous 34 percent.

All firms with oil-pumping contracts now face a Dec. 31 deadline to sign new joint-venture agreements giving PDVSA up to an 80 percent stake or have their oil fields reclaimed by the state. Before the joint ventures can be completed, the firms must also pay $3 billion (A2.5 billion) in back tax claims.

Besides BP and Exxon Mobil, the changes affect international majors such as Chevron Corp. and Royal Dutch Shell PLC.

"We're looking at a transitory period in which things are a little bit tense, but if we get through this, we'll be in a much better place. I believe there is a role for private oil companies here, and that the government believes there is a role for us here," said Sean Rooney, president of Shell Venezuela.

It's a trend mirrored across South America, where governments are squeezing more control and money from the energy sector, much as state-owned oil companies have done in many Middle East countries.

In Ecuador, demonstrators in two oil-rich provinces seized oil wells, dynamited pipelines and provoked spills during August protests that prompted a state of emergency.

It's time oil companies "give us our due," said Guillermo Munoz, governor of Sucumbios province, who helped lead the protests that froze oil exports for two weeks. Those protests and earlier disturbances in May cost Ecuador $445 million (A371.45 million) in lost production.

Ecuadorean President Alfredo Palacio later announced all contracts with private oil firms would be revised to ensure the government at least 50 percent of oil profits, up from 20 percent.

Poor Indians in Bolivia also are demanding a greater share of natural gas revenues. Bolivia has Latin America's second-largest gas reserves after Venezuela, and protests in the past two years have sparked violence and forced out two presidents _ Gonzalo Sanchez de Lozada and Carlos Mesa.

Congressman Evo Morales, an Aymara Indian who has led the protests and is close to Chavez, has emerged as a front-runner for December presidential elections. "You have to be brave. The president has to have the courage to take the oil fields," he said. "It doesn't mean the expulsion of the transnationals, but that we'll make new contracts."

Morales has said he wants to seize private gas fields held by foreign companies like Repsol YPF of Spain, Petrobras of Brazil and Total of France. But he has also said that he remains open to foreign investment as long as better terms can be negotiated.

Elsewhere, Argentina approved a new state-owned energy company last year, reversing a decade-old privatization policy. Peru passed a law to ensure 25 percent of royalties from its Camisea natural gas pipeline are funneled to poor communities.

In one sign of a backlash, investment in Bolivia's gas and oil industries dropped by 40 percent in the first half of 2005 compared to the same period in 2004, reversing a seven-year trend, according to the Bolivian Hydrocarbons Chamber.

But analysts say the region is unlikely to repeat past mistakes, when governments were forced to dismantle and privatize segments of the energy industry that had been nationalized in the 1970s. Countries are responding to pressures "to realign that deal in favor of the governments" now that energy prices are much higher than when contracts were first signed, said Roger Tissot of PFC Energy, an energy consultancy.

"We didn't expect a change to existing contracts but we do expect that governments will adapt their terms to the ... oil price reality _ not just here but all around the world. That's not a surprise," said Rooney of Shell.

Chavez, who blames U.S.-style capitalism for creating poverty in Venezuela, has spent billions of dollars in oil revenues from state company PDVSA for public works projects and social programs. Petrodollars have turned one abandoned oil depot into a bustling $3.2 million (A2.67 million) community center with a textile cooperative and a medical clinic, nestled between green hills and the Caracas slums.

"I'm proud of what Chavez is doing. He's brought us resources," said Margarita Rojas, 44, who works in a training program at the textile shop.

Chavez also has sought to solidify political alliances by offering oil sales on preferential terms to countries throughout the Americas. And he denies criticisms by some who say his policies are turning PDVSA into a government slush fund and are weakening the company by starving it of needed investment.

He has threatened to sell some refineries of PDVSA's wholly owned subsidiary, Citgo Petroleum Corp., arguing that current refinery contracts produce losses for Venezuela and constitute a subsidy for the U.S. economy.

PFC Energy's Roger Tissot points out, however, that Citgo has 14,000 U.S. retail outlets and "is a very important asset" because its refineries are able to process heavy Venezuelan crude and secure a market for it.

In a tight oil market, companies in Venezuela have so far accepted the increasingly tough terms. Representatives of Chevron, Exxon Mobil and Repsol didn't return calls seeking comment, but Susana Brugada of Norway's Statoil ASA said the firm remains committed to its investments here.

"Venezuela is a country of opportunities," said Brugada, whose company pumps crude with Chevron. "Statoil is in Venezuela to stay, and our plans are for the long term."

Associated Press writers Fiona Smith in La Paz, Bolivia; Edison Lopez in Quito, Ecuador; and Rick Vecchio in Lima, Peru, contributed to this report.

Copyright 2003 Associated Press

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